Calculate Peter Lynch's three stock valuation ratios to find out whether any stock is cheap or expensive relative to its earnings and growth.
How much are you paying per £1 of profit? The P/E ratio is the most widely used valuation metric and the starting point for analysing any stock.
P/E = Share price ÷ EPS (Earnings Per Share). A P/E of 15 means you pay 15× the company's annual earnings. Always compare within the same sector.
💡 Share price on your broker (Degiro, XTB) or Google Finance; EPS on the company's annual results or Yahoo Finance → "Statistics" tab.
⚠ P/E varies widely by sector. A P/E of 30 may be normal for a tech company and high for a utility.
Adjusts the P/E ratio for expected earnings growth. Popularised by Peter Lynch: a PEG below 1 suggests the growth justifies the price being paid.
PEG = P/E ÷ Growth rate (%). Two companies both at P/E 20 are very different if one grows 5%/year and the other 30%/year. PEG < 1 = potentially undervalued · PEG 1–2 = fair value · PEG > 2 = potentially overpriced.
💡 Growth rate: analyst estimates on Yahoo Finance → "Analysis" → "Growth Estimates", or calculate the 3–5 year historical average.
⚠ Future growth is an estimate. PEG is most reliable for companies with a consistent earnings growth track record.
A version of PEG that includes the dividend yield. Ideal for mature, dividend-paying companies — income from dividends is also return for the investor.
PEGY = P/E ÷ (Growth % + Dividend Yield %). Includes dividend income as part of total return. A company growing 10% and paying 4% dividend has the same total return potential as one growing 14% with no dividend. PEGY < 1 = attractive.
💡 Dividend yield: annual dividend per share ÷ current share price × 100. Found on the stock page of your broker or on Google Finance.
⚠ These ratios are analytical tools, not guarantees. Use them as a starting point, not the sole basis for any investment decision.
Peter Lynch — manager of the Fidelity Magellan Fund who achieved average returns of 29% per year between 1977 and 1990 — popularised these ratios in his book One Up on Wall Street. The goal was to give any individual investor a simple way to identify potentially undervalued stocks without complex financial models.
The P/E tells you what you are paying for current earnings. The PEG adjusts that price for expected future growth. The PEGY goes further and includes the dividend, recognising that the total return of an investment includes both capital appreciation and distributed income.
These ratios are starting points, not conclusions. A low PEG may indicate an opportunity — or it may mean the market does not believe in the projected growth. A high P/E may be justified if the company has a durable competitive advantage (moat). Always use these ratios alongside a qualitative analysis of the business.
From your first £50 to invest to international diversification — all explained practically, without unnecessary jargon.
See the book →